The Goods and Services Tax (GST) Council will hold its 41st meeting on August 27 to discuss the single-point agenda of compensation to states for revenue losses under the indirect tax regime. Several options including expanding the ambit of compensation cess, market borrowing to fund compensation deficit along with a future plan for rate rationalisation beginning from correction of inverted duty structure for some items are expected to be discussed in the meeting, officials said.
The meeting is expected to see a tussle between states and the Centre, as they have already voiced differing opinions on the proposal for market borrowing. A legal opinion by the Attorney General of India is learnt to have put the ball squarely in the Centre’s court, stating that the Centre does not have the obligation to pay for revenue shortfall and the Council can recommend to the Centre to allow the states “to borrow on the strength of the future receipts from the compensation fund”, with the central government to take the “final decision in the matter”.
States, on the other hand, are of the view that the compensation fund is unlikely to have enough funds, so it won’t have enough funds to cover for the borrowing by states. Some of them have instead suggested raising tax rates and bringing more items into the ambit of compensation cess to shore up revenues.
Some seek hike in rates
The resolution of compensation issue has been pending since October last. Some states have suggested that the Council should, sooner or later, consider raising tax rates.
States such as Punjab, Kerala and Bihar are not in favour of being asked to borrow to bridge the revenue gap, which will be then repaid from the compensation cess fund. Punjab has suggested five measures — ad-valorem compensation cess to factor in inflation, subsuming central excise duty on cigarettes and tobacco products in compensation cess, settlement of pending IGST dues, bringing back certain items into the 28 per cent tax slab, and inclusion of services consumed by rich in the topmost 28 per cent slab — as possible solutions to reduce the revenue gap and hence the burden of compensation to states. The rest of the shortfall in compensation could be then paid by borrowing by the Centre.
Bihar has also said that borrowing by states or the Centre, if to be repaid from the compensation cess fund, is not feasible and that the Council should consider raising GST rates, sooner or later.
On August 1, Finance Minister Nirmala Sitharaman said the Attorney General’s view on GST compensation was sought after consultation with states and a meeting of the Council would be held to discuss the legal opinion.
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